Follow by Email

Friday, February 3, 2017

MANAGEMENT SPECIAL.............. Leading a corporate transformation

Lessons
from an executive who has done so three times in the past dozen years.

Few executives lead corporate-transformation efforts at three
separate businesses before they turn 50, let alone businesses in three very
different industries. Davor Tomašković is one of them.

Stay current on your favorite topics

S

The CEO and president of the management
board at Hrvatski Telekom (HT), Croatia’s biggest telco (and a subsidiary of
Deutsche Telekom), first came to wider attention in 2004, when he took the top
job at the struggling Balkan retail and distribution group Tisak. After helping
the company to stave off bankruptcy and helping turn it into the biggest
national player in its sector, Tomašković was, in 2006, appointed CEO of TDR, a
successful regional Croatian tobacco manufacturer that nevertheless faced a
challenging economic and regulatory environment in the wake of the global
financial crisis.

At HT, by contrast, where he became
president and CEO in January 2014, Tomašković inherited a company that had been
losing market share for at least five years but is now once again expanding
after a radical cost-cutting and reorganization plan. In this interview (at
HT’s Zagreb headquarters) with McKinsey senior partner Jurica Novak and
McKinsey Publishing’s Tim Dickson, Tomašković reflects on common lessons from
the three transformations, including the importance of quick results, the value
of data-driven decision making, and the particular environment of emerging
markets in the Balkan region.

The Quarterly: How different were the three transformation
experiences you have been through?

Davor Tomašković: The first company, Tisak—now Croatia’s largest
distributor of cigarettes, prepaid vouchers, and newspapers—was on the brink of
a new bankruptcy and facing major cash-flow problems when I became CEO, in
2004. To give you an idea of what it was like, it was not certain, during my
first week, that the wages of the 3,000 persons then employed by the company
could be met. It was a company in dire straits.

TDR, which had some of the same
shareholders as Tisak, was much bigger and highly profitable when I arrived, in
2006. However, it also faced an uncertain future owing to the fact that
negotiations to sell the business to Philip Morris International—one of five
global companies that, between them, control 84 percent of the worldwide
market—had just collapsed. As a consequence, PMI had withdrawn its license
agreement for us to manufacture Marlboro cigarettes.

Hrvatski Telekom posed, yet again, a
different scenario. The challenge here was to turn around a company that had,
in effect, failed to meet most of the targets set by its parent, Deutsche
Telekom, between 2009 and 2014. What was needed was a program to arrest HT’s
obvious decline and a new growth strategy.

The Quarterly: Speed seems to be an important part of your
management approach. Why is it important to act quickly when you want to change
an organization?

Davor Tomašković: At Tisak, the organization was ripe for change
because there was a burning platform. It was obvious that without rapid action,
the company would not survive.

At TDR, on the other hand, I initially
experienced resistance because the company was demonstrably highly
successful—the prevalent mind-set among senior management was to preserve the
status quo and not to embrace change. Speed, in this case, was of the essence
because market trends and fluctuations were already indicating that without
early change, the company’s performance would probably have declined within a
year.

It is particularly critical to move fast
and demonstrate early success when workforce morale and management credibility
are low. This was the case at HT, which was consistently missing critical
targets, though employees and managers worked hard and the company enjoyed a
good, albeit declining, position in the market. They felt demoralized. In early
discussions, it was clear that many were skeptical of my ability to add
tangible value; rather than blaming performance, they felt they were battling
overambitious targets and other circumstances beyond their control. While it’s
true that telcos throughout Europe were in decline, the reality at HT was that
profits were falling faster than revenues because the company had failed to
adjust its costs. It was important to demonstrate this.

The Quarterly: Do you think that managers, more than shop-floor
employees, are potentially the obstacles in a transformation?

Davor Tomašković: One of my first moves at HT was to de-layer the
organization. We not only reduced the number of management positions by
one-third—from 300 to 200, in some cases removing two out of six tiers of
management—but reshuffled or rotated another third of them. Only one-third of
managers retained their existing positions. That reshuffling brought a new pair
of eyes to almost every situation. Combined with an early attack on other
costs, such as the review of our collective-bargaining agreement and contracts
with vendors, it demonstrated unequivocally that there was real scope for
improvement.

Everything starts with the managers. In
every organization I joined, I started by making changes at the top; I have
never made changes from the bottom up. At HT, I also replaced five of the six
board members within my first year, for the simple reason that I did not think
they had the right mind-set or the will to effectively implement change,
primarily because they perceived that to do so would be an admission of past
wrongdoing.

The Quarterly: A lot of CEOs say that after the initial jolt,
it’s hard to stop people from falling back into old habits. How do you guard
against that?

Davor Tomašković: We attempted to circumvent this by launching a
comprehensive three-year transformation program at HT. The first year was about
building credibility and reducing costs. In the second year, the focus switched
to customer experience and to addressing our deficiencies in the marketplace.
Year three has been about driving revenues and returning the company to growth.

The first year was vital for gaining
initial credibility. It was critical, during that period, to focus on results
and to achieve all preset targets. Once that was done and the dividends of
change were obvious, then most people were ready to come on board and to
respond to fresh challenges. It is vital to identify the right priorities at
each stage of a transformation. We could, for example, have spent more time
early on building up the culture of the company, but as far as I was concerned
that was not the most pressing issue at the time. It would have been a
distraction to devote our energies to this.

The Quarterly: To what extent do you rely on gut instinct when
making decisions, and how much on analyzing the data?

Davor Tomašković: Moving fast and executing well are, as I have
said, two of the most vital ingredients of a successful transformation. A
third, for me, is to stick closely to the facts when it comes to decision
making and not to allow instinct to take over. In the tobacco business, for
instance, successive policies to curb smoking mean that tax represents 80
percent of the retail price of a cigarette. It is common knowledge that this
tax is going to increase year on year. At TDR, one of the key decisions was
therefore how much of that burden to pass on to customers.

For years, managers used to rely on
instinct and tradition, using their own personal predictions of how they
thought competitors and customers would respond. As a nonsmoker from outside
the industry, I had no idea what impact a price increase might have. So I
insisted that we build a model showing the effect, on the profitability of each
brand, of passing on or not passing on the tax increase to the customer, or
perhaps only passing on part of a particular tax increase. This fact-based
sensitivity analysis allowed us to see what the impact of any pricing moves
might be on our volumes and allowed the company to make better, more informed
decisions.

The Quarterly: Do you see no place for gut instinct?

Davor Tomašković: I think it is easier for someone to develop a gut
feeling when they’ve spent 20 or 30 years in an industry; then, perhaps, some
soft factors can be allowed. However, I was an outsider to each of the
companies in my custody. Here, working with gut feeling was not an option. I
always try to push for an analytics-driven, fact-based approach. Doing so
doesn’t mean you get all the assumptions right. By building different
scenarios, you can vary the assumptions and at least know how much the output
is likely to change with each one. Nothing is black and white. It’s always
about choosing between two shades of gray, whether the decision was about
building a new tobacco factory at TDR or investing in new telecom
infrastructure at HT.

The Quarterly: How do you think about leadership during the intensity
of a transformation?

Davor Tomašković: In all three of the companies where I have been
CEO, I inherited bad leaders as well as good ones. I think CEOs have to be
comfortable with the people they’re surrounded by. They have to share the same
set of values; if that’s not the case, then having conversations and making
decisions becomes difficult. In my view, the best leadership style encourages
open discussion, but once we make a call, we all stand behind it, no matter how
different the views aired previously. When there is a bad decision, I never go
back and investigate why or find someone else to blame. I try to look forward
and see what I can do to rectify the situation, to make a new decision that
will set us on the right track again.

As a leader, I always try to delve into
the details myself. There are experts for everything you need in a
company—people who have done certain jobs, certain work, for many years and
know exactly how things are done. The role of a leader is to aggregate and
distill all those inputs and expert views and come to an informed decision.

It is also vital, as a leader, to know
what the levers are in your chosen industry. In tobacco, as I said, it’s about
pricing—a wrong decision can quickly turn a profitable company into an unprofitable
one. In retail distribution, the margins are extremely small. You need to be
very, very cost conscious. You need to be very careful about making big bets,
because big bets can backfire. The telecom sector, on the other hand, is very
capital intensive, so you need to manage investments expertly because you make
decisions today whose effect becomes evident only with the passage of time.

The Quarterly: How do you see the strategic outlook for telcos in
Central and Eastern Europe?

Davor Tomašković: The reality is that the European telecom market is
in decline. It is highly fragmented, with about 150 to 200 operators serving a
population of 250 million people, against just 4 operators for a similar number
of people in North America. Incumbents face overregulation, while new,
unregulated players—such as WhatsApp, Viber, and Facebook—are offering similar
services to the same customers.

Companies like HT, which hold large market
shares in their home markets, have little scope to grow traditional products.
It therefore becomes imperative to run ultra-efficiently and to find
alternative revenue streams outside the core telecom business, be they in
digital services or content and IT-related activities. It is also important to
grow in markets where regional synergies may be harnessed to justify high
capital investment and to maintain competitiveness and long-term
sustainability. Large players like Deutsche Telekom, British Telecom [BT
Group], Telefónica, Orange, and Vodafone must lead the next wave of consolidation.
In the Balkans, we at HT can play a role—in Slovenia, Bosnia, and Serbia, the
state-owned telecom companies will sooner or later be privatized.

The Quarterly: What should companies looking in from the outside
know about the Balkans?

Davor Tomašković: The markets in Southeastern Europe are very small
and are lagging behind Western Europe in market development. Trends evident in
Western Europe will only become apparent here in a few years’ time.

The environment in which companies operate
in the Balkans is also much less stable and predictable. We operate in a
scenario, for example, in which it is possible to face the sudden introduction
of a new government tax that is required to float the budget or perhaps because
the government feels that a particular industry is sufficiently profitable.
This is not something which would normally happen in, say, the UK or Germany.

Another key difference is the governance
model. There are many private companies, owned and managed by the first
generation of entrepreneurs here, which have not made that transition from
entrepreneurial to professional management. This will change when the current
generation of entrepreneurs reaches the end of their working lives, and there
will be an opportunity for foreign private-equity investors to capture and
consolidate some of their assets.

The Quarterly: Going back to your own experience of leading three
companies, do you personally prefer being in the turnaround phase or plotting
new areas of strategic growth?

Davor Tomašković: Turnaround situations are very exhausting and
require a lot of effort and energy. It is not possible to be in a turnaround
situation forever. That’s why I focus on speed and execution at the beginning,
in order to spur fast motion. This then lets me step back and say, “OK, where
are we taking this company five years from now? What are we going to do with
it? What is going to be the environment in which we’re going to operate? How
are we fit for that environment? What do we need to change over the long term?”

For a CEO, it’s easier to manage a company that is
currently not doing well, because people understand the imminent need for
change. On the other hand, it is far more risky because you may find, when you
start, that it’s too late to succeed. Your space to maneuver is very small and
the time horizon very short. If you make a mistake in your judgment, the
company may fall over. I would always feel more comfortable improving the
performance of a company that is doing relatively well rather than one on the
brink of bankruptcy.